What to consider before merging with a contractor

By Rick del Monte, FAIA, December 29, 2016

This Shake Shack in Dallas was designed and built by The Beck Group. The construction group was involved from day one, providing cost estimates for multiple design schemes as well as studies on how construction would impact existing tenants.

The merger of an architecture firm and a construction firm is a massive endeavor; think over these six issues before proceeding

Back in 1999, our then-87-year-old construction firm merged with Urban Architecture, a 46-person architecture firm. The goal was to create an integrated firm—christened The Beck Group—that would allow us to "revolutionize the industry and change our future." Overall, this merger has been a success. The CEO is now a 40-year-old architect, and we have grown to over 150 architects in six offices. More importantly, most of the original architectural leadership team is still with the company.

At the time of the merger we felt like pioneers, and as such there were issues we never fully anticipated. If your architecture firm is thinking about a similar merger, consider these elements of the process before jumping in.

Culture is critical. No matter how elegant the strategy or strong the business case, the culture of the organization and the quality of the individuals will determine the ultimate success of the new firm. If the firm you are planning to merge with does not already have an outstanding reputation for collaboration and team building, don't assume a merger will change that.

Does the contractor care about design? Quality of design is one of the core values for any good architecture firm. There should be evidence that any potential partner cares about design and aspires to do the same quality of work as your firm.

Do you care about process? The integration of design and construction takes a great deal of process and structure to work effectively. If you enjoy having a loose, unstructured firm, you will struggle to adapt to this new reality. Also, in order to effectively integrate finances you will most likely need to switch to construction-based accounting software. It took us two years to make the full switch, but without it you will not be able to achieve real financial integration.

The culture of the organization and the quality of the individuals will determine the ultimate success of the new firm.

The financial compensation structure can be very different. Most architecture firms keep very little capital in the firm and distribute the majority of the profits at the end of the year. Construction firms require bonding, which requires a significant capital account in the firm. The majority of my dividends remain in the firm to build the capital account and buy out any exiting partners. These dividends are then paid out at retirement (or termination). However, this money funds the firm's activities and is at risk. Unlike what you hear at most architect gatherings, contractors have more risk because they have more assets that an owner can pursue. You will need to get comfortable with delayed compensation and having your money at risk.

The business model isn't what you thought. After twenty years in the profession, I was quite certain I knew how contractors operated and made profits. I had no idea. The hourly/professional model is very different from the contractor business model. It has been very rewarding, however, to dive in and understand the full picture.

Technology matters. One of the driving forces behind our merger was the optimization of BIM technology, allowing for use of the model from design through construction. This can be done without the legal barriers typically encountered between two separate firms. Optimizing the use of technology is one of the real competitive advantages of a merged firm, and potential partners should be in alignment on this.

Our merger has been a challenging but ultimately rewarding experience, and the 10 months we invested in getting to know our future partners beforehand certainly paid off. The potential upside is significant; just make sure you go into the process with your eyes wide open.